On May 24, 2002, eight of 15 Honolulu Liquor Commission inspectors were indicted on 57 counts of racketeering and extortion, for allegedly taking bribes from bar owners in return for ignoring liquor law violations. The bribes and money extorted from the liquor licensees ranged from $20 to $1,000 per night from primarily 45 Asian "hostess" clubs and other strip clubs of the more than 1,500 liquor licensees on the island of Oahu. The eight liquor inspectors were convicted and are now serving time in federal prison.

The conviction of these city employees raised the proverbial question, “Who was minding the store?” Since the Honolulu Liquor Commission is a city agency administratively attached to the city’s Department of Budget and Fiscal Services, and is responsible for enforcing state liquor laws in the City and County of Honolulu, the Honolulu City Council was concerned over poor management and breakdown in controls that permitted such corrupt and flagrant abuse of power to go unchecked.

Bars, Bribes and Liquor Inspectors: A History of Corruption. Corruption within the “hostess” bar scene in Honolulu is not new and has been ongoing for more than three decades. Most of these bars are owned and operated by Korean and Vietnamese nationals who have immigrated to Hawaii, and are located within a three-mile radius of Honolulu’s infamous Kapiolani Boulevard and Keeaumoku Street. While many of these bars are similar to strip bars in other states, the major difference in Honolulu is that “hostesses” are permitted to sit in semi-private booths with bar patrons. Much of the illegal activities occur within these booths, from hostesses consuming alcoholic beverages, to drugs and prostitution.

Attempts to clean up the Honolulu Liquor Commission can be traced back to 1987, when the then city finance director, with the help of another city administrator and support of the mayor and city council, uncovered massive abuse and illegal activity by city liquor inspectors. In some cases, inspectors were taking in bribes from club owners, as much as $1,000 a night, and gifts of food, liquor and sexual favors, in exchange for “looking the other way” when they witnessed illicit activity. This investigation led to the firing of some of the liquor investigators and the resignation of the commission administrator. However, its success was also met with threats against investigators and witnesses who testified against the perpetrators. In one case, a witness’ bar was burned to the ground.

Council Requests an Audit. In October 2003, after several council hearings failed to provide sufficient information on issues related to the management of the liquor commission, the council adopted a resolution requesting my office to conduct a performance audit. Conducting an audit of an agency, some of whose employees were rumored to have ties with the criminal underworld, was not popular with my office staff. For my part, I certainly did not want to receive a dead fish wrapped in newspaper at my office front door. (While a dead fish on one’s doorstep could mean a threat à la the Godfather movie, in Hawaii this could have a double meaning: if the whole fish happens to be a 100-pound ahi or big eye tuna, which can retail for around $22.95 a pound, it could be a generous bribe from an anonymous “friend.”) I was not deterred. After assessing all potential risks, I decided to undertake this audit during our fall 2004 audit cycle.

Scoping the Audit. The council resolution requesting the audit was, as usual, very broad, and a challenge to scope. However, since a second F.B.I. investigation of the liquor commission was ongoing, we decided to defer any examinations of investigative functions to the federal agency. This helped to limit our scope. Since I only had one staff member to initiate the audit, we decided to focus our audit primarily on selected management issues, specifically personnel management and oversight roles and responsibilities of the liquor commission staff and commissioners. This rather narrow approach was driven in part by my limited staff resources and my desire to get a report to the council as quickly as possible, which for our office is generally around six to seven months.

To avoid poor planning and “discovery auditing” or what we commonly refer to as audit planning during fieldwork—the usual cause for a long, protracted, and drawn-out audit projects—our office’s audit planning and scoping process shaped the framework for the audit, which in turn became the road map for the development of the audit workplan. We were able to assign a second staff member to the project after several months into fieldwork, but it still took us all of eight months to complete the audit.

Wrapping up: The Audit Results. The day after the public release of our report, the morning headline for one of the two Honolulu daily newspapers read, “Audit flogs liquor panel.” While the word flog might be a bit sensational, our audit findings were highly critical of the oversight and management of the Honolulu Liquor Commission.

Overall, we found that the oversight and management of the Honolulu Liquor Commission are inadequate and require improvement to ensure that the commission fulfills its responsibilities under the state laws. In addition, we found that the management of the liquor commission staff continues to be hampered by ineffective operational practices. We reported that while a number of steps have been taken to address past problems, a number of issues either have not been addressed or are being ineffectively pursued, and as a result, the potential effectiveness of the commission to perform its duties is hampered. Finally, we made a number of recommendations to the Honolulu Liquor Commission, the liquor control administrator, and the mayor to rectify the problems. In its response to our audit draft report, the commissioners and administration of Honolulu Liquor Commission said they accepted our recommendations and planned to implement each of the recommendations listed in our draft report.

Immediate Impact. The audit report findings, along with validating evidence, served as a significant catalyst for major reform to take place at the liquor commission. Soon after the release of our report, the council member whose district had the largest number of liquor licensees called for the firing of the liquor control administrator and chief investigator, as the first step. One of his first public statements included that “the chief administrator and chief inspector of the Honolulu Liquor Commission have presided over the most corrupt, most mismanaged, most unaccountable liquor commission in the history of the city and county of Honolulu. It is time for these two men to go.” While public support for this agency and its managers waned as news articles and editorials critical of the liquor commission appeared in the news media, sometimes on a daily basis, the administrator and chief investigator refused to step down. The administrator was quoted as saying that “I have no intention of stepping down; I believe that there’s a lot of work to be done and we’re intending to do that.”

However, over the next three months, the city council used its budget and fiscal policy oversight powers to continue its scrutiny of this embattled agency. In a city council budget committee hearing, a vote on a proposed hike in liquor licensee fees was deferred to pressure the commission to take action on its top two administrators. On another front, the council continued to pressure the commission for changes during confirmation hearings of several of the mayor’s appointees to the liquor commission, and also introduced legislation for a proposed charter amendment to make the top two administrative positions of the commission exempt from civil service. Finally, on July 14, 2005, the Honolulu Liquor Commission voted unanimously to strip its chief administrator of his duties, citing the change as partly a response to the city auditor’s report that faulted the administration to effectively address operational issues, leading to poor staff morale and concerns that the commission is unable to fulfill its responsibilities. Several days later, on July 21, 2005, the commission unanimously accepted the resignation of its chief administrator, calling the action a first step in regaining the public’s trust after a string of scandals under his leadership.

Conclusion. While the impact of an audit report and its effect on change in government is too often subtle, nondescript, and can take many years, we relish the satisfaction that comes with having an immediate and significant impact, as was the case for this audit. As performance auditors, we need to frequently remove our green eyeshades and become risk takers. We should be unafraid to gamble on a project to undertake—even if its outcome has the potential to be highly and politically sensitive. While media coverage of a critical report can usually be expected, it has the added benefit of increasing our exposure among the public stakeholders we serve and, more importantly, helps to level the political playing field by providing them with accurate and timely information on the performance of a city agency. However, we should never use the amount of media coverage as the sole measure of success, since the outcome and public benefit of a highly charged audit usually becomes clear only in retrospect. Sometimes we just need to roll the dice. I’m just glad that a dead fish never appeared at my front door.